On July 15, 2021, the Second Circuit issued its ruling in Homaidan v. Sallie Mae, Navient Solutions, LLC, which essentially reviewed and interpreted 11 U.S.C. §523(a)(8)(A)(ii) to determine that private student loans under this section may be dischargeable in bankruptcy and in this specific case, the loans were determined to be discharged.
Homaidan v. Sallie Mae
The Debtor in this case took out two (2) direct to consumer tuition answer loans (“Loans”) from Sallie Mae between the years of 2003-2007. These loans were not paid to the higher educational institution but were rather paid directly to the Debtor and the loan proceeds exceeded the costs of his tuition. After graduating, the Debtor filed for Chapter 7 bankruptcy and was eventually discharged. It was unclear whether or not the Loans were discharged under the discharge order and therefore, after collection efforts, the Debtor repaid the Loans in full. Upon payment in full, the Debtor re-opened his bankruptcy and filed suit against Sallie Mae and its successor, Navient Solutions, on the basis that the Loans were not student loans that are non-dischargeable under 523(a)(8) and therefore were discharged in his Chapter 7 bankruptcy.
Navient filed a motion to dismiss under the theory that under 523(a)(8)(A)(ii), the Loans were prevented from being discharged. It argued that the term “educational benefit” encompassed all private student loans. The district court in Homaidan v Sallie Mae disagreed and found that 523(a)(8) exempt student loans in a narrower view and not all private student loans are nondischargeable. Navient appealed to the Second Circuit. The only argument on appeal was: whether the loans were funds received as an educational benefit subject to nondischargeability. Navient did not argue that the Loans fell into 523(a)(8)(A)(i) and 523(a)(8)(B); rather it solely focused on the language in 523(a)(8)(A)(ii) that the Loans were “an obligation to repay funds received as an education benefit, scholarship or stipend.”
The Second Circuit analyzed this argument based upon the statutory interpretation of the Code itself and Congressional intent of such construction. The Court in its review found that the strict and plain meaning of the Code does not support Navient’s interpretation. The Court also found that had Congress intended to exempt all private student loans from discharge, it would have specifically stated so in the Code. The Second Circuit read 523(a)(8)(A)(ii) and “educational benefit” to refer to conditional grants, scholarships, or stipends and does not cover private student loans. As it was not argued by Navient that the Loans fell under 523(a)(8)(B), “any other educational loan that is a qualified education loan, as defined in section 221(d) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual,” the Second Circuit did not analyze or base its ruling on that section of the Code.
Therefore, certain types of private student loans that may not qualify under 523(a)(A)(i) and 523(a)(B) may indeed be dischargeable by a Debtor. This ruling, while a move towards discharging private student loans, was strictly and narrowly decided based upon one section under 523(a)(8).
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